June 6, 2007
How to Avoid “Deer in the Headlights” Syndrome
If this scenario has not happened to you, you haven’t been trading enough:

You’re excited. You see your set-up or read a great news report on a company and can’t wait to execute the trade. You do, buying a bit larger position than you’re used to, but this is the ’sure fire’ trade they say that will make your year right in front of your eyes. Excitedly, you watch as you start to make money!

Suddenly, without warning, something goes wrong. “Why has the stock retraced to my buy point?!” you ask. “They must be shaking out the weak hands. I have to be strong!” you exclaim.

Before long, you’re underwater, but that’s ok. You didn’t bother to place a hard stop yet because, well, this was a great trade. Or maybe you did place a stop and you pulled it out when the market approached, sure that the market would reverse right when ‘they’ took your stock away by wicked stop-running tactics.

So now the stock has blown through your original stop and you’re still in the trade… losing money as a flood of (in this case) sellers are entering the market and driving the price lower against you.

YOU FREEZE.

You don’t know what to do. Your palms are sweating, your heart is racing and your head is pounding. “How could this be happening to me [again]?!” you exclaim.

You have just experienced “Deer in the Headlights” Trading Syndrome. You’re in a situation you never anticipated and you’re losing money faster than expected. You know you should exit (or get out of the road or oncoming traffic) but you can’t.

I can point to at least three occasions in my personal day-trading where this has happened and they stand out in my memory because they cost me so much money and I felt horrible for days after experiencing such unexpected and deep losses. Events like this force you to the crossroads - either you quit and walk away disgusted or you get back up and learn your lesson and vow never to let that happen again.

How can you prevent this from happening?

This is a little harsh, but really the only way to ‘overcome’ this is to have it happen to you personally - and I don’t mean superficially. I mean, you have to have an experience where it hurts your account, your pride, everything. But for those of you to whom this has not happened (and you are actively trading… especially day-trading), it will and the best thing to do is be prepared.

First, include this (or a similar) sentence into your trading plan:

“I will honor my stops” and “I will only take positions that are within my position sizing limits” or alternately “I will not take positions larger than normal” (define what this means for you personally.

But IF you violate these rules (that’s ok - don’t beat yourself up too much yet), then there’s one thing left to prevent a catastrophic loss that erodes days or weeks of profits:

When you are psychologically frozen, TAKE ANY ACTION AT ALL to unfreeze yourself.

What do I mean? Place a physical stop. Place a bracket order. Hit the “sell now” button. DO SOMETHING.

When you take action, you physically release the ‘block’ on your brain functioning. It might be the wrong action at the time, but it is an ACTION. Perhaps the stock will reverse but you can’t take this chance. Don’t lower your stop to the next technical decision node, be it a trendline or a moving average or a Fibonacci projection. Your mind is clearest when you evaluate risk/reward and support/resistance when you don’t have a position on. Negative psychological effects are at their lowest when our trading account is clear of positions and we can evaluate a bit clearer.

Technical analysis deals strictly in probabilities, not certainties. You cannot AFFORD to play in probabilities when you are rapidly losing money. It is best to kill the trade immediately, or alternatively, place a hard exit stop just below the current price (market order, that is, not a limit order. When you want out, you want out. Don’t play games for a few cents). If the market takes you out, at least the ‘pain’ stops. Odds usually favor the stock continuing its rapid descent rather than reversing. In the rare cases the stock does reverse after your exit, that’s fine. It’s just probabilities. You cannot AFFORD one trade to continue to go against you and negate weeks of profits. It is NOT an option and you must prevent large losses literally at any cost.

In summary, when you are gripped by fear and frozen by a rapidly losing position, TAKE ANY ACTION in your account - exit immediately or place a market stop-out order slightly away from price but do NOT play games, do not perform sophisticated technical analysis, and do not remain motionless.

When a car hits a deer, not only is the deer ‘damaged,’ (or killed) but so is the car (and sometimes the people in it).

When the market hits you like a car, the market is never the one injured - you are. Sudden catastrophic losses may destroy something more valuable than your trading capital: Your will to trade and your hopes and dreams in one fell-swoop. Prevent this above all else.

Thats good advice TRO.It helps also to credit the guy on the other side of the trade and to consider that someone out there is looking at the same stock and thinking short sale.If you see a logical short sell point you should seriously consider getting out immediately.Hope springs eternal, but if you are hoping you're losing.

TheRumpledOne:
I'm new to StockFetcher and I'm learning how to scan for stocks. I have found a few scans that produce some pretty nice % upward moves. Scanning for stocks is easy, but then knowing which one to pick from that list is the million dollar dilemma.
When I do a scan in the morning, it brings a list of stocks, some
have already made a positive % upward move and some are down. Then they seem to stop their upward momentum and either stabilize or retrace. It looks to me like the scan brings a list of stocks that have already made their move. Or by the time the scan has identified a stock using the scanning criteria, it has already gapped up and stabilized and buying it at that level would be risky. How do you know which stocks to pick and when to buy, from the scanned list?
Trader needs help

I don't know if you are a day trader, a swing trader or an investor but the bottomline is the same. You have to TRADE as in ENTER and EXIT the trade. And that only takes a second or two. All the rest of the time is spent WAITING!

I have a group of stocks that I call my Herd of Cows. I milk them everyday. If you are interested, just check out the GAP STATISTICS filter I posted in the Filter Exchange forum.

My favorite cow is AAPL. I like to trade AAPL because of 1) volume, 2) volatility, 3) day range and 4) tight spread. With AAPL, I know if it moves $.10 in either direction from the open, the probability it moves $.50 or more in the same direction is over 60%. Also AAPL usually fills the gap about 60% of the time. Vegas would kill for those odds. But I still have to TRADE AAPL. If I make a mistake, I experience a loss. It's all how I trade AAPL that makes the difference. You can make $100 or more a day even if you only trade 100 shares. But trading 1,000 shares makes it easier.

So rather that trying to build a winning filter and acting like a butterfly moving from stock to stock, find ONE stock and learn HOW TO TRADE PROFITABLY and DON'T WORRY ABOUT WHAT OTHERS ARE TRADING, HOW MUCH THEY ARE MAKING, OR WHAT YOU COULD HAVE MADE HAD YOU TRADED SOME OTHER STOCK. FOCUS on what YOU are trading, your portofilio and your method. Do NOT get distracted.

TheRumpledOne
Good morning, sorry it took me a day to get back to you, I was gone from home most of yesterday. Thank you for responding to me with your trading advice. Like I said yesterday, Iâ€™m fairly new to trading and your wisdom would be very much appreciated. I really want to learn this trading business and how to do it successfully. I do have a couple of questions about your post yesterday, if you don't mind. There are a couple things I don't understand.
1. Iâ€™m not sure what you meant by this statement "You have to TRADE as in ENTER and EXIT the trade" ? Do you mean do a quick daytrade on the stock when your trading plan has done what you expected it to do, then take your profit and get out?
2. About this statement, "With AAPL, I know if it moves $.10 in either direction from the open, the probability it moves $.50 or more in the same direction is over 60%". Are you saying here, to play the predictable day range of a favorite stock either go long if it goes up or short if it goes down?
3. Does this method work with lower priced stocks, lets say in the $.50 to $ 3 dollar range? Do you know some lower priced stocks that have a predictable day price range that this method will work on, since I'm working with around $4000.
4. About this statement, "Also AAPL usually fills the gap about 60% of the time". So if I understand you correctly on a gap play, you buy the stock on the gap down at the open, the idea would be to buy it at the gap level expecting it to go back up to its original price level, thus reaping the profit? And the same if it gaps up, you short the stock expecting it to fall back down to its original price level too.
5. One last question: I saw one of your scans that says "Double your money", do you have any advice on how to pick a stock from that scan and what conditions are advisable for an entry point?

1. Iâ€™m not sure what you meant by this statement "You have to TRADE as in ENTER and EXIT the trade" ? Do you mean do a quick daytrade on the stock when your trading plan has done what you expected it to do, then take your profit and get out?

NO. I am talking about the cycle you go through:

Wait
Enter
Wait
Exit

2. About this statement, "With AAPL, I know if it moves $.10 in either direction from the open, the probability it moves $.50 or more in the same direction is over 60%". Are you saying here, to play the predictable day range of a favorite stock either go long if it goes up or short if it goes down?

NO. I am talking about a statistical trade of AAPL.

3. Does this method work with lower priced stocks, lets say in the $.50 to $ 3 dollar range? Do you know some lower priced stocks that have a predictable day price range that this method will work on, since I'm working with around $4000.

This method works with any instrument but first you have to run the statistics.

4. About this statement, "Also AAPL usually fills the gap about 60% of the time". So if I understand you correctly on a gap play, you buy the stock on the gap down at the open, the idea would be to buy it at the gap level expecting it to go back up to its original price level, thus reaping the profit? And the same if it gaps up, you short the stock expecting it to fall back down to its original price level too.

Sort of. You have to trade in the direction the stock is moving at the time.

If it gaps down and continues to drop, I wouldn't buy!

5. One last question: I saw one of your scans that says "Double your money", do you have any advice on how to pick a stock from that scan and what conditions are advisable for an entry point?

I really had a good laugh about milking the cows.But anyway I like to add my two cents about freeze ups,but this was rather a blow up.I remember one time I was trading a $25 stock.Yes it was liquid,no it did'nt seem volatile,and yes I was trading a listed stock over $10,something I don't do too often.Anyway I went out to lunch,came back,and the stock was at $22.50.Do the math on 1000 shares.How did I know someone was going to dump a million shares on the market while I was eating?That was an expensive lunch.The point is,always set a stop the second after you place a trade.In trading,anything can and will happen for no apparent reason.Don't get pissed off,get out.My new way of looking at a trade is using this word,"direction".If my position is not going in the right direction,I'm gone.No emotion,no problem,I'm out.And its true,if it never happened to you,you just have'nt been trading long enough......

TheRumpledOne
I like your advice to simplify things by picking only one stock with the right criteria, learn it's trading patterns and then trade it. This makes perfect sense to me, rather than jumping from one filter to another scanning for the best stocks. For you AAPL is that stock, but I don't have enough money in my account to trade Apple, only around $4000. So if I trade AAPL with $4000, that’s only about 32 shares and even with a .50-cent profit per trade that’s only $16 profit minus $14 for commission, leaving me with a $2 dollar net profit. So I need to find a stock that has similar trading criteria as AAPL but much cheaper, for me to make a decent profit.
1. What do you suggest? Do you have a scan filter that finds stocks with similar characteristics like AAPL, but lower in price for newbies with a small bankroll? And if you do have that scan filter, how do you sort the columns to achieve maximum effect?
2. I'm still not clear on a couple things you said earlier.
You said: I have a group of stocks that I call my Herd of Cows. I milk them everyday. If you are interested, just check out the GAP STATISTICS filter I posted in the Filter Exchange forum.
Are you talking about the “FADING THE GAP STATISTICS FILTER”?
3. Original question: I saw one of your scans that says "Double your money", do you have any advice on how to pick a stock from that scan and what conditions are advisable for an entry point?
Your answer: I would pick the stocks with higher volume and higher range.
New question: I'm not sure what you mean by pick one with a higher range, range of what? What is range?
Sorry for all the questions, I hope I'm not too annoying, please be patient with me. I'm sure this is all second nature to you, but not for me. Like I said before, I really want to learn a simple method of trading like you suggest, and stick with it. I do respect your knowledge and contribution to this StockFetcher board, I've learned a lot from reading your posts and looking at your scan data. I sure would appreciate your advice and help in learning this trading game.
Thank You
riro

1. What do you suggest? Do you have a scan filter that finds stocks with similar characteristics like AAPL, but lower in price for newbies with a small bankroll? And if you do have that scan filter, how do you sort the columns to achieve maximum effect?

$4,000 is NOT enough money to daytrade stocks.

2. I'm still not clear on a couple things you said earlier.
You said: I have a group of stocks that I call my Herd of Cows. I milk them everyday. If you are interested, just check out the GAP STATISTICS filter I posted in the Filter Exchange forum.
Are you talking about the “FADING THE GAP STATISTICS FILTER”?

Yes.

3. Original question: I saw one of your scans that says "Double your money", do you have any advice on how to pick a stock from that scan and what conditions are advisable for an entry point?
Your answer: I would pick the stocks with higher volume and higher range.
New question: I'm not sure what you mean by pick one with a higher range, range of what? What is range?

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